All signs point to a house price hike

In my pre-Christmas piece I mused that house prices could rise by around 10 per cent this year.

There was not a lot of opportunity in that column to expand on the background to that forecast but it is apparent that such a bullish call in house prices is unpopular with a range of other forecasters thinking that house prices will be closer to flat through 2013. Some of the usual suspects expect prices to fall again, an expectation that would mean a never before seen three straight years of falling house prices in Australia.

While the daily house price data from RP Data is clearly volatile and prone to reversal when viewed in small increments, it is somewhat interesting that house prices in the first ten days of 2013 have already risen by 0.6 per cent. It would be premature to get too enthused about these sorts of very short-term moves, and there are some quirks in the daily data, but something just might be afoot with such a significant rise already.

The reasons behind my expected strong rise in house prices this year (The top 10 big issues for 2013, December 24) are linked to issues associated with housing affordability (interest rates, current house prices and wages) plus the consistently low unemployment rate, a tight rental market and a likely positive wealth effect from what has been a strong lift in the stock market. An acceleration in population growth is another factor that is likely to add to underlying demand for housing.

The HIA-CBA Housing Affordability index shows that national affordability in the September quarter 2012 rose to the highest level since 2009 to be just shy of the highest level in a decade. When the December quarter data is available around the middle of February, affordability will have had a further significant boost, perhaps to be at near multi-decade highs.

This is because during the December quarter, mortgage interest rates fell by around 40 basis points as the Reserve Bank sliced the official cash rate by 50 basis points. The level of interest rates is a critically important aspect in determining whether or not buyers are able to step up in the housing market and borrow more and pay more for houses. It is also clear from the agencies that calculate housing data that house prices were probably a touch lower in the December quarter, aiding the level of future affordability and setting the scene, somewhat perversely, for a house price rebound. While data on wages growth for the December quarter is not yet available, even a conservative guess would be that wages rose around 0.7 per cent or so in the quarter to provide yet another element to boost affordability and with that, the prospect for a sharp rebound in house prices this year.

Adding to these bullish factors is the fact that the unemployment rate has remained low, below 5.5 per cent. This means that the scope for a rising appetite for borrowing is favourable. Added to that, consumer finances are in sound shape. Saving levels have been replenished over recent years and many borrowers have taken advantage of the current interest rate cutting cycle to pay off the principal in their current mortgage. This robust balance sheet for consumers frees them up to ramp up borrowing and bid up house prices in the not too distant future.

There has also been a strong wealth effect for households from rising stock prices on the ASX. This is boosting wealth and the financial position of the household sector. While the link between rising stock prices and buoyancy in house prices is only very general, there have been periods where a reallocation of investment cash out of a strongly performing asset (stocks) and into one that has significantly underperformed (housing) has boosted the underperformer. The same scenario could be unfolding now with the ASX up a hefty 20 per cent since the middle of 2012 to be near fresh 19-month highs.

Furthermore, in 2003 when mortgage interest rates were under 7 per cent (like now) and the unemployment rate was at 6 per cent or less (like now), annual house price growth averaged over 15 per cent during a two-year period. In other words, house prices rose by more than 30 per cent in just two years.

Even the GFC-inspired dip in mortgage interest rates in 2009, coincidently when the unemployment rate was anchored below 6 per cent, saw a peak 18.8 per cent annual lift in house prices unfold during 2010.

All the fundamental factors are aligned to support higher house prices in 2013. The fact that so many people are bearish on house prices only adds to the scope for a sharp rebound in prices as there is a rush to catch up through pent-up demand needing to be satisfied.

If there is a 10 per cent rise by the end of 2013, it will come on top of a cumulative fall of around 5 per cent in house prices in the prior two years. This will mean that the average increase over a three-year horizon will be a lousy 1.5 per cent per annum, hardly the stuff of a blow away housing bubble. What happens in 2014 and beyond may be a different question.

Some say "this time it’s different” but I suspect it isn’t. Australian consumers still love housing, the tax system favours individuals having a highly-geared house and the core underpinnings are very supportive of housing.

Favourable affordability, low unemployment and interest rates, and some pent-up demand point to what could be a corker of a year for house price growth.

More from Business Spectator


Please login or register to post comments

Comments Policy »
With the cash rate at 3%, unemployment at 5.2%, local rental vacancies below 0.5%, I am happy to quietly accumulate cash flow positive properties while the bulls and bears fight it out :) (All signs point to a house price hike, January 10.)
'HIA - CBA Affordability index is at ten year highs' - What a completely reliable and unbiased source for property data in Australia, with no vested interests whatsoever (All signs point to a house price hike, January 10).
Australian housing affordability is still abismal in comparison to pretty much all other global markets. Is that worth mentioning? Or am I just one of the uninformed property perma bears?
House prices will go up because of the interest rate cuts (All signs point to a house price hike, January 10). The RBA is trying to replace the mining boom with a housing boom (jobs between these industries will at least be transferable - construction/retail etc). I don't like this as it is like for like what Greenspan did in the US post 911 - ie over time keep lowering interest rates so that u can boost asset prices. It buys time but you know where that ended up. Lets hope the RBA do not go too far with this.
While most people would love to own their own home, the high price of land looks like a bubble, and in the current economic environment most people are being very cautious, with good reason (All signs point to a house price hike, January 10).
Job vacancies are low, unemployment is likely to increase, and the new normal for retail seems to be a domain of price-aware, restrained shoppers.
Tweaking a variable like mortgage rates may shift consumption forecast by an economic model, but in the real world it's a totally different matter.
I'm more in the "stable or slight fall" group when it comes to property prices. It all depends on employment (All signs point to a house price hike, January 10).
Slightly off topic... but I would like to see negative gearing reduced to one property per person/couple at a time. Some people suggest that it should be stopped altogether but I would just like see it reduced to a reasonable level.
This would also save the government a fortune and in the times of a deficit that would be a good thing.
So what do you think? Is it an interesting topic for around the water cooler?
One sign that doesn't point to a medium term house price rise is the coming end of Australia's greatest mine and processing investment cycle and the likely rise in unemployment and decrease in incomes it will cause.(All signs point to a house price hike, Stephen Koukoulas, 10 Jan 2013)
The current committed projects investment phase run off heavily in 2014. They commence running off in 2013.
If no new major commitments are made (which is a real possibility given costs, falls in prices and overseas competition) then fear of unemployment and loss of income will begin to hit pretty hard during late 2013.
That is not a good sign for house prices.
Hopefully the Australian public have learnt their lesson and wont be stupid enough to go on another debt binge (All signs point to a house price hike, January 10).
I think the best we can hope for the current gentle hiss of a deflating market that is still historically high by anyone's standards.
Considering the low number of job vacancies at present, I doubt there are too many people feeling confident enough to load up on debt.
Maybe it's time we started thinking about why the family residence is such a sacred cow tax shelter
There appear to be a number of oversights that makes one doubt the timing of the conclusions drawn (All signs point to a house price hike, January 10).
Final Qtr price data has headed down again from the 'recovery' in the 3rd Qtr, it's hard to regard the first week's data as sufficient to invalidate this established down trend.
Recent headlines have job vacancies at 30 mth lows. Previous business spectator articles had made much point of our official unemployment rate not being able to reflect the true situation in the country. If lower interest can induce higher prices then it'd be a case of harnessing the population's tendency to gage affordability more accurately than risk of job losses.
The stock market rally only lasted less than half a year thus far, the rotation of funds out of property and into shares may not be complete until later this year.
Conditions were easier in 2003 for spectacular rises, since then prices are now much higher and debt leverage much greater. Also unlike 2009 we no longer have the same stimulus and debate has been more about fiscal austerity and achieving a surplus.
The correction period may have been considerable however the magnitude certainly wasn't - this was due to a series of policy supports and rate cuts that slowed the correction process. Until the excess price against intrinsic value gets significantly unwound one would agree with the rest of the mainstream that it remained too early to call a recovery.
the latest ABS state that housing construction for nov11/nov12 was only +0.5% whereas non housing rose 36.4% (All signs point to a house price hike, January 10).
which I would say means residential housing has reached a peak and old age villages and city apartments construction are increasing.
From this you can deduce that houses are either static or we have a glut , so house prices will fall not increase.
Wow ... 0.6% in ten days! Why, that's 21.9% annually! Best to buy now!
Spoken like a true property spruiker. If it is "premature to get too enthused about these sorts of very short-term moves" then why bother mentioning or commenting on it?
Sounds like typical pre-emptive ass-covering for when your house price hike doesn't eventuate. Of course, just like Mr Joye, you will still be able to claim you were right from the start! (All signs point to a house price hike, January 10).
It's timely that we are reading Stephen Koukoulas' Business Spectator post on the same day that Stephen Grenville's article on the recent failures of general economic forecasting ('Why forecasting has broken down') was posted. Given the wide disparity of views of experts and layfolk alike on 12 month domestic housing asset price movement (where inputs and drivers should be readily available), one has to wonder whether any confidence can be placed in forecasts of more complex economic outcomes (All signs point to a house price hike, January 10).
I myself am renting, think there are shaky times ahead and believe(and to be honest hope ) for more declines in prices in my suburb in the sutherland shire (All signs point to a house price hike, January 15).
The aspect commentators forget is lack of confidence. When I invested in property before I bought expecting prices to rise steadibly and predictably. I don't expect that to happen for a number of years and I am open minded to the fact that a decline like Japan with 22 years of straight declines is possible.
Stephen - I am a big fan of yours and I don't dispute your prediction but why oh why is a 1.5% increase in 3 years 'lousy'? (All signs point to a house price hike, January 10.) I am an Economist and I seriously don't understand why it is a good thing for housing prices to be high and rising? Houses are things workers live in so that they can do other productive things. Sure new dwelling constructions are great and involve real investment and jobs - but rising prices in existing stock does no-one any good accept divert resources into an asset bubble. Great if your'e in the real estate business but rubbish for other parts of the economy.
I mean look at what good the rising housing prices did in Spain in the US. It is all champagne and parties for a while but the hangover is never pleasant.
A "muse" that house prices could rise by around 10 per cent this year is presented as "a bullish call in house prices" with implied revulsion at the thought that we could have "a never before seen three straight years of falling house prices in Australia' (All signs point to a house price hike, January 10). Not heard of the Great Depression? While "it would be premature to get too enthused about these sorts of very short-term moves" said promoter then does exactly that - "but something just might be afoot with such a significant rise already" - invoking a degree of wishful thinking more often seen either in fairly tales or in the brochures of company promoters.
How conveniently Stephen has forgotten the dishonest and self-serving - but now discredited - 2008, 2010 and 2011 predictions by the National Housing Supply Council of ever more happily alarming dwelling shortages?
Forgotten that 75% of 35-year-olds can't afford a mortgage, or that 22% of Sydneysiders own 55% of homes?
Or land-banking? Lend Lease is sitting on 33 years' supply to keep the price high - good business practice is it not?
Official RBA position is to allow house prices to track wage growth. Not exceed it. Long term wage growth is less than 3.5% (All signs point to a house price hike, January 10).
The RBA is loathe to create bubble conditions.
Gillian, not a cashflow positive property anywhere in sydney unless you are looking at a 50% deposit. And how many people take into account strata fees etc (All signs point to a house price hike, January 10).
Last time I looked the place I currently rent for $600 pw would cost me $1,800 a week in repayments to buy with a 10% deposit. (Sydney's inner west)
A further lift in house prices will push things beyond the absurd.
A crucial element suppressing property prices is the tightening of bank regulations - from experience I have seen that the banks are increasing credit standards even for well collateralised borrowers with strong mortgaged assets (All signs point to a house price hike, January 10).
It is pretty obvious that credit growth is stagnant unlike its pre-GFC levels of 18% per year. The main reason why the stock market has advanced recently is due to investors chasing franked yields as opposed to ultra low term deposits.
I'm not looking forward to snapping up a few bargains in 2023, nor am i interested in anything on the market at today's prices (All signs point to a house price hike, January 10).
those who arent expect prices to stay high forever are predicting a japanese like slow deflation over 10yrs, but this has not been the case recently everywhere else in the world where drops were quite rapid so care to explain "why we are different?"
Either way, this is a frustrating situation for generation X and Y. Buying a house to live in used to be a no brainer decision, lending & banking used to be boring.
I just can't see houses rising. People are trying to pay down debt in order to feel more financially secure (All signs point to a house price hike, January 10). We just sold our house as the huge mortgage that we once didn't worry about all of a sudden became a recent concern due to heightened global and domestic risks. We would certainly not buy in 2013. I'm sure many others feel the same way. I wouldn't be surprised if something left field occurs in the next few years that devastates house prices. I'm sure house buyers in Ireland in 2007 did not think that there was even a 1% chance of house prices falling in the future. Today they are more than 50% lower and still falling. I just can't take that risk. I rather buy in Ireland as long term the upside is greater than the downside where in Australia it is the opposite.
Stephen, thanks for your article but for a 10% rise in 2013, is that for all properties? No matter what their price is, for the whole of Australia? Or is the rise for the 'average property' per capital city? (All signs point to a house price hike, January 10.) Anybody help me out on the above points thanks.
Why are rising prices of homes considered to be "a good thing"? If the price of any other basic necessity goes up, people squeal like stuck pigs. And then they happily pay tens and hundreds of thousands on cars which depreciate immediately, and that's also ok in their eyes (All signs point to a house price hike, January 10). Stupid but ok. But when it comes to property, folks seem to have a mental disorder - a psychotic obsession. House prices simply must go up. People freak out if they don't. The entire country starts a punch-on that makes Bathurst look like a nun's picnic. What is wrong with them? Is it simply that the greed cannot be contained or hidden? They should get help. Their kids are going to need it for sure. Australia - shot itself in both feet. Well done. And for our next economic miracle we present....err, nowt. Brilliant.
Towards the end of this year the effects of the ending of the mining investment boom will start to be felt - particularly in WA & QLD. This will progressively get worse up until late 2014 when it wouldn't surprise me to see unemployment close to the double digits level (All signs point to a house price hike, January 10).
I think house prices still have a fair way to fall and would strongly suggest hold off buying for another 18 months or so.
Brilliant Jeremy Fry, couldn't have said it better myself! (All signs point to a house price hike, January 10.)
Are majority investment properties in Australia negatively geared? An interesting idea came to me when I was waking up this morning. The idea is that when so many property investors negatively gear their investment, the property market is over valued. Negative gearing implies a negative return, that is rental income is less than the interest expense. If you liken a property investment to owning a business (I'm not sure this comparison is valid), negative gearing means you're making a loss. Nobody is in his or her right frame mind if he or she borrows to buy a business only to make a loss after paying interest. If you don't borrow to invest in a business to make an annual loss why should you borrow to invest in a property to make an annual loss? But investors who negatively gear their properties are aiming for future capital gain when they sell them. (All signs point to a house price hike, January 10).
We have a world where GDP is being supported by borrowing, we have a country where the national income has been dropping every month for a year and a Government that is borrowing 100mil a day (All signs point to a house price hike, January 10).
When the economic malaise of this country continues, interest rates continue to drop and the overseas people investing their cash here for the return start to realise its to risky for the reward, the money will head back offshore and our dollar will drop.
Borrowing from overseas could then become more expensive for the banks and interest rates will have to rise. Unemployment is very linked to China and the little bounce they are experiencing is no reason the say all their problems are behind them.
If they dont continue to buy lots of our comodities then our unemployment rate will rise, loans will default and the asset base of the banks will fall along with their share price. Money they borrow will be more expensive.
Buy a house now if your job is 100% secure in ANY economic climate and you dont mind if the price does drop because you have a secure income for 10 years and know you will hold it for at least that long. Not many people in that group I'd imagine.
I will look forward to 12 months time to see if Stephen Koukoulas prediction of a 10% rise comes true but I think there is no way.